I often discuss why it’s important to look at a company’s ability to pay and grow dividends in the context of determining its quality.
It’s certainly not the only way that quality can be determined, and should just be one of many tools in an investor’s arsenal.[ad#Google Adsense 336×280-IA]But a very important tool.
It simply comes down to a company’s ability to drive increasing profit and cash flow for years on end.
Without that increasing cash flow, increasing dividends for decades on end can’t realistically materialize.
So what could one surmise about a company that’s able to pay increasing dividends for almost sixty straight years?
You’d probably surmise that it’s a business that was incredibly consistent in its ability to produce products and/or services that people and/or other businesses desire in order to generate the increasing cash flow to pay rising cash dividend payments for almost six decades.
That spans Vietnam, the Cold War, massive inflation of the early 80s, the 1987 stock market crash, Desert Storm, the housing bubble, and the financial crisis.
Which is why you may want to consider Dover Corp. (DOV) here.
Dover Corp. is an industrial conglomerate that manufactures a range of specialized industrial products and sophisticated manufacturing equipment.
They serve a variety of industries. They operate through 40 individual businesses with a number of brands within those businesses. This collection of businesses have been built through innovation as well as acquisitions, leading to increasing cash flow for decades on end.
DOV manufactures all kinds of products that may not be familiar to the average consumer, but are necessary in a variety of end markets. Products ranging from glass doors for refrigerators and freezers to diamond inserts for applications in drilling for the energy industry make up just a small portion of this company’s product portfolio.
The company operates through four segments. Engineered Systems is their largest segment with 43% of fiscal year 2013 revenue. The Energy segment generated 26%; Communication Technologies, 19%; Printing & Identification, 12%.
So let’s take a look at their financial results over the last decade to get a feel for what Dover’s operations are generating.
Revenue was $5.488 billion in fiscal year 2004. That grew to $8.730 billion in FY 2013. That means the company delivered a compound annual growth rate of 5.29% over the last decade.
Earnings per share increased from $2.02 to $5.78 during this ten-year period. That’s a CAGR of 12.39%, which is quite impressive, in my view. The only negative I see with that is that there were a lot of acquisitions during this period, so it’s difficult to know what organic growth would have been otherwise.
S&P Capital IQ anticipates that EPS will grow at a 12% annual rate over the next three years, almost exactly in line with what the company’s generated over the last decade.
I hinted at their dividend growth record earlier in the article, which is absolutely incredible.
The company has increased its dividend for the past 59 consecutive years, which is one of the longest records that exist. That easily qualifies them as a “Champion” on David Fish’s Dividend Champions, Contenders, and Challengers list.
And instead of finding a company that’s long past its prime and handing out piddly raises here and there to keep a streak going, DOV has increased its dividend at an annual rate of 11.8% over the last ten years.
The stock yields 2.30% right now, backed with a low payout ratio of just 32.6%. That means there’s plenty of room for continued dividend raises of a rather generous nature, especially with the growth rate in earnings.
I always like to look at a company’s balance sheet, which helps me determine how appropriate management is treating shareholders’ money, as well as how flexible the company is in case unexpected duress comes upon them.
Well, DOV has a solid balance sheet. The long-term debt/equity ratio is 0.48, which is not only attractive in absolute terms, but also relative to the industry. Dover’s interest coverage ratio is 11.2, which means EBIT covers interest expenses more than 11 times over.
Their profitability across the board compares well to peers. Net margin has averaged 9.67% over the last five years, while return on equity averaged 15.89%. Both numbers have been steadily improving over the last decade.
Dover is clearly a great company. And even though they’ve been growing at a very robust rate over the last decade and paying a growing dividend for almost six, it’s still only a $11 billion company. So there’s plenty of opportunity yet ahead to continue growing and increasing its dividend.
What’s great is that, through their acquisition strategy, they’re able to grow while also concentrating on markets they’re already familiar with. And like some competitors, they allow these acquired businesses to operate somewhat independently in order to continue doing what they do best. This allows focus while also diversifying the business across multiple industries and markets.
There are risks to carefully consider, however. Energy is a major segment for them and falling oil prices may reduce demand for their products. In addition, their aggressive acquisition strategy means they have to constantly value acquisitions properly and integrate them successfully while also allowing independence within the decentralized management style.
I’m not a shareholder in this company, but I’m strongly considering adding it to my personal portfolio in the near future.
Shares in DOV are offered for a P/E ratio of 14.18 right now, which is in line with their five-year average. The stock has been weak as of late, suffering some downside apparently as a result of volatility in the energy sector. It appears fairly valued here with that kind of P/E ratio, even factoring in potential weakness in earnings.
I valued shares using a dividend discount model analysis with a 10% discount rate and an 8% long-term growth rate. That rate is well below DOV’s long-term EPS and dividend growth rate. Factoring in a low payout ratio and a forecast for continued strong profit growth, and I think this rate is reasonable. The DDM analysis gives me a fair value of $86.40.
Bottom line: Dover Corp. (DOV) is a high-quality industrial conglomerate. They’ve increased their dividend for 59 consecutive years, one of the longest streaks in existence. And that dividend growth has come on the back of rising profits due to a business that’s well-diversified across markets, industries, and products. I see nothing that indicates that they won’t be able to continue their dividend growth streak for many years to come. If you’re looking for one of the surest bets around for rising dividend income, DOV’s track record is about as good as it gets.
— Jason Fieber, Dividend Mantra[ad#DTA-10%]